Watsco Q1 Earnings Call Highlights

Key Points

• Management said the market is stabilizing as the transition to A2L refrigerants matures, with demand momentum into April, gross margins “largely intact,” and the company remaining debt-free.
• Watsco agreed to acquire Jackson Supply (about $230 million in annual sales), adding 25 Sunbelt locations and expects the deal to close in Q2 while retaining Jackson’s leadership and providing capital, technology and incentives to support growth.
• E-commerce sales grew ~16% and the OnCall Air platform increased customer sales ~20%, with management forecasting OnCall Air GMV to exceed $2 billion this year and citing online sales as higher-margin and a driver of long-term stickiness, alongside expanded tech and AI initiatives.

Watsco NYSE: WSO executives told investors the company saw “improving stability” in the first quarter as the industry’s transition to A2L refrigerant products matured, while also outlining a pending acquisition and continued investment in e-commerce and technology initiatives aimed at long-term margin and growth goals.

Management cites stabilizing trends as A2L transition matures

Chairman and CEO Albert Nahmad said first-quarter results pointed to “improving stability now that the transition to A2L products has matured,” adding that the company expects “a more simplified business environment this year,” though he cautioned it was still early in the summer season.

In the Q&A, VP Rick Gomez described a market that is “not yet fully healed,” but said performance improved as the quarter progressed. Gomez said the company exited the quarter with March up “high single digits on the same-day basis” and that momentum had continued into April. “Three weeks into April, I can tell you that that momentum has sustained itself,” he said, while emphasizing Watsco would remain cautious given the selling season was still ahead.

EVP and Secretary Barry Logan pointed to signs of improving contractor behavior, noting that e-commerce sales “kind of bloom[ed] this quarter” and that contractor credit remained “in very good shape.” He also said Watsco saw an increase in higher-efficiency systems sold, calling the indicators encouraging, albeit early.

Jackson Supply acquisition expected to close in second quarter

Nahmad also announced an agreement to acquire Jackson Supply, calling it a “legendary market-leading Sunbelt distributor” with approximately $230 million in annual sales. He said Jackson will expand Watsco’s Sunbelt presence by 25 locations and add diversification of brands and products, including a strong presence in parts and supplies. Watsco expects to close the transaction sometime in the second quarter.

Nahmad emphasized that Jackson’s leaders are expected to remain with the business and continue operating it, consistent with Watsco’s approach to acquisitions. In response to analyst questions, he said Watsco has known Jackson for more than 20 years and views the business as a strong cultural and strategic fit. “All we wanna do is support it so that they can continue to expand,” he said, pointing to potential support through capital, technology, and equity incentives for leadership.

E-commerce growth and OnCall Air scale highlighted

Nahmad said Watsco’s e-commerce sales increased 16% during the quarter, outpacing overall growth. He also highlighted growth in OnCall Air, a digital platform designed to help contractors present and sell solutions to homeowners. Nahmad said OnCall Air increased customer sales by 20%, reflecting what he described as a richer mix of high-efficiency systems.

He said Watsco expects the gross merchandise value for OnCall Air to exceed $2 billion this year.

In the Q&A, management described e-commerce as both a margin and cost-to-serve benefit. The company said it realizes higher gross margin on online sales than offline sales, and that customers using digital tools create “stickiness” in future revenues. Management also cited examples of subsidiaries where a majority of sales are transacted through e-commerce tools, and Logan added that Watsco sells more line items per invoice online versus offline.

First-quarter performance: sales mix, margins, expenses, and balance sheet

Nahmad said sales increased 2% in U.S. markets, reflecting a mature mix of A2L products and an improved mix of high-efficiency systems, offset by lower unit sales. He said unit volume stabilized as the quarter progressed.

Gross margins were “largely intact,” which Nahmad attributed to execution to sustain pricing and competitiveness. He reiterated Watsco’s long-term gross margin goal of 30% and said the company continues to pursue initiatives intended to enhance gross margins over time.

SG&A expense was flat, as improved operating efficiency offset incremental technology investments and new locations, according to Nahmad. He also emphasized the company’s balance sheet strength and said Watsco remains debt-free.

Inventory, pricing, and technology initiatives

Management fielded multiple questions about inventory levels and turns. Nahmad said Watsco expects to reduce its investment in inventory as market conditions normalize, improving inventory turns and contributing to cash flow. SVP Paul Johnston said supply chains are more solid and suggested manufacturers may now be able to produce a “single line of products continuously throughout the year,” which he said could help inventory turns.

Executives stressed that comments about improving inventory turns were not about structural destocking, but about operating with lower average inventory while maintaining service levels. Logan said the goal is to “own less inventory on average throughout a given year” as manufacturer lead times and delivery reliability improve. Management also discussed the role of Watsco’s systems, including its Hydros platform, in increasing product assortment while carrying less inventory by turning inventory faster.

Logan added that while dollar inventory comparisons can be influenced by product mix and pricing, Watsco “own[s] less units at the end of March than we did a year ago,” noting the current inventory is composed of A2L product versus a prior-year mix that included legacy refrigerant products. Johnston also said the A2L shift requires an indoor and outdoor unit, and Watsco has increased indoor unit inventory to accommodate A2L requirements.

On pricing, Nahmad and Johnston said manufacturers face pressure from duties and that price increases have already occurred from some OEMs, with expectations for broader increases. Johnston also noted that realized price increases can be less than announced increases due to customer and contract mix. Management said Watsco’s pricing and administrative tools help implement large-scale SKU pricing changes more quickly and reduce lag risk after OEM increases.

Looking ahead, Nahmad outlined several technology and growth initiatives the company is pursuing, including:

• New innovations aimed at capturing more sales to large institutional customers, expected to launch in the second quarter.
• Expanded use of pricing optimization tools in pursuit of the long-term gross margin target.
• A new initiative to compete and grow in the fragmented parts and supplies segment.
• Early efforts to harness artificial intelligence to improve customer experience, operating efficiency, and data-driven growth strategy.

In closing remarks, Nahmad said the company is “very excited about the future,” highlighting Watsco’s ability to invest through acquisitions and post-acquisition support over the long term.

About Watsco NYSE: WSO

Watsco, Inc is the largest distributor of heating, ventilation, air conditioning and refrigeration (HVAC/R) equipment, parts and supplies in the United States. Headquartered in Miami, Florida, the company operates a network of more than 600 branches across the continental U.S., Canada and Puerto Rico. Watsco serves residential and commercial contractors by providing essential components for climate control systems, including air conditioners, furnaces, heat pumps, coils, refrigerants, controls and electrical and piping supplies.

Founded in 1947, Watsco has grown from a single regional distributor into an industry leader through a combination of organic expansion, acquisitions and strategic partnerships with original equipment manufacturers such as Carrier, Trane, Goodman and Lennox.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.